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Beyond your paycheck: an employee benefits primer.

Most of us measure job compensation by the numbers on a paycheck. But there's much more to it than that. While wages and salaries represent the major portion of compensation, other benefits constitute a large share, too. Recent BLS data show that employee benefits in medium and large firms accounted for more than 27 percent of total compensation (see chart 1). In March 1990, employers in private industry paid $4.13 an hour in benefits for every $10.84 in wages (see chart 2). By some measures, the portion is even greater. The U.S. Chamber of Commerce estimates that, in 1987, the cost of benefits in the companies it surveyed averaged 39 percent of the total payroll; that is, for every 61 cents a worker earned, another 39 cents went to benefits.

What kinds of benefits does your job provide? Does your health plan offer catastrophic coverage? Is disability insurance a part of the package? Do you know the difference between a copayment, an ESOP, and a "cafeteria" plan? These questions concern all workers and jobhunters. But many of us would be hard pressed to answer them fully and accurately. Employee benefits is a complicated topic. At best, a benefits plan can provide security against economic disaster. At worst, it can lead to a false sense of security that may be dispelled only when its too late.


Job benefits have been a part of compensation for the entire lives of most people working today. But what exactly are benefits? According to the Employee Benefit Research Institute, employee benefits represent "virtually any form of compensation provided: (1) in a form other than direct wages; and (2) paid for in whole or in part by the employer, even if provided by a third party . . . . Different benefits serve different social and economic needs."

Generally, benefits fall into three categories: Statutory, compensatory, and supplementary. Statutory benefits, that is, those required by law, include Social Security, workers' compensation, and Federal and State unemployment insurance. Compensatory benefits are wages paid for time not worked, such as vacations, holidays, sick leave, and coffee breaks. Supplementary benefits, the main focus of this article, most commonly include health insurance, pension plans, and life insurance; but a wide range of other benefits are also in this category.


Congress passed the Social Security Act in 1935, which forms the foundation of the employee benefits system. Today, there are three basic components of the Social Security program: Old-Age, Survivors, and Disability Insurance; Hospital Insurance; and Supplementary Medical Insurance. The first two components are financed by Social Security payroll taxes, often referred to on pay slips as FICA, and acronym for the Federal Insurance Contributions Act. You and your employer split the cost of these taxes, which total 15.5 percent of earnings in 1990. Your portion of this tax, 7.65 percent, is deducted directly from your paycheck. Employers, on average, paid 89 cents per hour worked--6 percent of all compensation costs and more than a quarter of all benefits costs--in 1989.

Social Security is the largest legally required benefit. In 1989, 39 million people received Old-Age, Survivors, and Disability Insurance benefits. Total payments exceeded $230 billion.

These payments included the following: 1) monthly benefits to retired or partially retired workers who are at least 62 years old, their eligible spouses, and dependents; 2) monthly benefits to disabled workers, their eligible spouses, and dependents; 3) a lump-sum payment and monthly benefits to eligible survivors of deceased workers. The monthly benefits are related to the average earnings on which a worker pays taxes through his/her working life.

In 1990, the maximum monthly benefit is $975. Social Security benefits under the Old-Age, Survivors, and Disability Insurance program replace a portion of the income of retirees and other recipients. The intent of the program is to provide a minimum floor of protection; it was not designed to meet all of a recipient's financial needs. To enjoy the same standard of living in retirement as you do now, you'll have to supplement it with personal savings, investments, and an employer-sponsored pension plan.

The Hospital Insurance program and the Supplemental Medical Insurance program are commonly known as Medicare. The Hospital Insurance program helps pay for in-patient hospital care and some followup care outside the hospital. Everyone who is entitled to Social Security pension benefits is also covered by the Hospital Insurance program. The Supplemental Medical Insurance program is voluntary; those who participate must pay a premium. This program helps pay for doctors' services, outpatient care, and other services and equipment which the Hospital Insurance program does not cover. The participate in these programs, persons must be: (1) age 65 or older, (2) receiving Social Security disability benefits for more than 24 consecutive months, or (3) disabled by kidney disease requiring dialysis or a transplant.


Time off with pay--for annual vacations, lunch hours, coffee breaks--is the most common employee benefit. The 1989 BLS survey of employee benefits in medium and large firms found that 97 percent of full-time employees received paid vacations. The length of vacations depended upon the number of years an employee had been with a company. Paid holidays, averaging about 9 days a year, were available to 97 percent of employees. Similar benefits included paid personal leave, funeral leave, jury-duty leave, and military leave. Three percent of workers had paid maternity leave; 1 percent had paid paternity leave; unpaid maternity and paternity leave was available to 37 and 18 percent of new mothers and fathers, respectively.


Unlike statutory benefits, which are uniform throughout the country, supplementary benefits vary from region to region and employer to employer. The benefits packages offered by employers in certain industries, such as manufacturing, are frequently more extensive than those available in other industries; larger firms generally pay more in benefits than smaller firms; and unionized workers usually earn better benefits than nonunionized workers.

Much of the growth in employee benefits has been encouraged by tax incentives that work to your and your employer's advantage. These tax-favored employee benefits can be divided into two groups: Those on which taxes are deferred and those that are tax exempt. The largest tax-deferred benefits are employer contributions to pension plans. You pay no taxes on this money until you withdraw it, usually in the form of a pension, when you will most likely be in a lower tax bracket. Tax-exempt benefits include employer contributions to health and life insurance plans and a variety of smaller benefits. You pay no Federal, State, or local taxes on the money employers spend on these benefits.

Health Insurance

Two public programs, Medicaid and Medicare, provide health coverage for the poor and the elderly in this country, but for the vast number of Americans, no mandatory coverage is available. With today's high cost of health care, therefore, job-related health benefits are among the most important employee benefits. The BLS survey showed that health care and life insurance, along with paid leave, were the most widespread employee benefits in medium and large firms. Health and care benefits were provided to 92 percent and life insurance to 94 percent of all full-time employees.

Although health care benefits are generally available in the workplace, the specific benefits offered by employers vary considerably. And because employee health costs have risen so rapidly in the last several years, many employers are changing the health packages that they offer their workers. More employers are requiring their employees to pay part of the premium costs for coverage. In 1989, only 48 percent of employees had their health insurance premiums fully paid by their employer; 72 percent did in 1980. Thirty-one percent received fully paid family coverage--down 4 percent from 1986.

There are many varieties of health insurance, though most fall under two broad categories: Basic health plans and major medical plans.

Basic health plans. These plans generally cover expenses associated with hospitalization. Plan provisions fall in three categories: Hospitalization, which pays for such charge as room and board, intensive care, medical supplies, and nursing services; physician care, which pays for hospital visits by physicians; and surgical, which pays for surgery.

Major medical plans. These plans are either supplemental or comprehensive. Supplemental plans cover services that are excluded under basic plans. Comprehensive plans offer the combined coverage of both a basic and a supplemental plan. Comprehensive plans are the most common.

The 1989 BLS survey found that 74 percent of all health plan participants were covered by a fee-for-service medical plan. These plans pay for specific medical procedures as expenses are incurred. Generally, you can visit the physician of your choice, who then presents a bill to the insurance plan for payment. Physicians increasingly require payment by the patient, who then submits the bill for reimbursement by the insurance plan.

Generally, fee-for-service health plans impose some requirements upon their participants. To help contain costs, these plans usually incorporate deductible, coinsurance, and maximum coverage limits.

A deductible is a specified amount of medical costs that you must pay per year (and per person if others are covered by your plan) before any expenses are reimbursed by the plan. For example, suppose that your health plan carries a $250 annual deductible. You injure your ankle playing basketball. You visit your physician, who finds the ankle is broken. The doctor sets the bone, places it in a cast, then presents you with a bill for $300. If you have had no expenses from previous visits to a doctor this year, then you must pay the $250 deductible, and the plan picks up the remainding $50.

Coinsurance requires that you pay a percentage of the medical expenses, called the copayment, and the plan pays the remainder; copayments are usually in addition to the deductible. Using the previous example, if your plan imposes a 20-percent coinsurance fee, your broken ankle will cost you an additional $10 copayment. The amount paid by the plan may depend on the nature of the medical care you receive.

Most medical plans have a ceiling, or maximum, on the coverage. The limit may be per episode, per year, or per lifetime. Sometimes, different limits are set for different kinds of care. Lifetime maximums are typically set very high, such as $1 million.

In the 1989 BLS survey, 17 percent of the employees participated in prepaid medical plans offered by health maintenance organizations (HMO's). Since 1975, the rate of coverage by HMO's has nearly tripled. With some variation, HMO's are organizations of physicians and other health professionals who provide a wide range of services to participants for one fee set in advance. When participants do require services, they may also pay a nominal per-visit charge of $5 or $10. These organizations generally provide more comprehensive services at a lower cost than do health insurance plans. But they have less flexibility.

About 10 percent of the employees in the BLS survey were covered by "preferred provider" organizations. These organizations agree to offer health services to participants at pre-negotiated rates in return for an increased number of patients, faster claim processing, or both. They differ from HMO's in that you will have several choices of providers, and they differ from other health insurance in that your choice of physician is restricted.


The principal benefit you may receive is a pension, or retirement income. A pension is probably the largest single benefit an employee will receive in terms of percentage of total compensation. In The Responsive Workplace, Sheila Kamerman and Alfred Kahn state that "employees view entitlement to a pension as the second most important benefit they receive at work, after health and medical insurance."

There are two basic kinds of pension plans--defined benefit plans and defined contribution plans. A defined benefit plan promises that a specific benefit, determined by specific formulas, will be paid to workers when they retire. A defined contribution plan prescribes the rate of employer and employee contributions and how these contributions will be allocated to specific employee accounts.

Federal regulations establish certain standards governing employee participation, vesting, and benefits accrual. In most situations, employees become eligible to participate in a plan when they reach 21 years of age and have completed 1 year of service. After they have satisfied certain age and time requirements, employees become vested, which means that the pension benefits they have earned are theirs and cannot be revoked. If they leave the job after vesting and before retirement, they may receive these benefits immediately or may have to wait to retirement age to collect them, depending upon the conditions of the plan. Laws also set standards for survivor benefits and annuities, that is, the amount of money to be paid each year.

Statutes allow employers some flexibility in extending pension coverage to their employees. For example, coverage may differ for hourly and salaried employees, employees working in certain divisions of a company, or union and nonunion employees.

Defined benefit plans. In its 1989 survey, BLS found that 63 percent of the employees in medium and large firms participated in a defined benefit plan. Governed by numerous regulations intended to protect employees, defined benefits can be very complex. The Employee Benefit Research Institute reports, "Ironically, as a result of the complexity, many employees do not understand their plans; therefore, they do not value or appreciate them."

These plans use various formula to calculate a retirement benefit. Flat-benefit formulas determine retirement benefits by multiplying a certain sum per month by years of service. For example, a plan may guarantee a worker $15 monthly times the number of years of service; a retiree with 30 years of service would receive $450 per month ($15 per month times 30 years of service), while one with 20 years would receive $300. Plans for unionized workers commonly employ this formula. Earnings-based formulas have a number of variations. For instance, plans using terminal earnings formulas calculate the pension benefit by multiplying a percentage of the employee's final average earnings times the number of years of service.

Employers who offer defined benefit plans commit themselves to an unknown cost that can be affected by such factors as the rates of return on investments, changes in regulations, and future pay levels. Employers assume the risk of paying a specific retirement benefit. If the fund earns a lower return than expected or suffers a loss, employers must make additional contributions. Many are coming to see these plans as too risky. While the majority of pension plan participants are covered by defined benefit plans, the trend in recent years is towards defined contribution plans.

Defined contribution plans. Defined contribution plans do not promise a specific benefit to workers on retirement. Employers contribute a specific amount or percentage of salary into the plan for each participant. Benefits are based on the amount of employers' contributions plus investment earnings. Because the funds are held in individual employee accounts, the employee bears the investment risk rather than the employer. In 1989, 48 percent of the full-time employees participated in at least one kind of defined contribution plan.

In general, employers' contributions are determined each year and allocated to individual employee accounts. The plans may also provide for mandatory or voluntary contributions by employees as well. Defined contribution plans offer distinct advantages to employees who change jobs frequently. More liberal vesting provisions, for example, mean that participants earn their benefits more quickly than defined pension plan participants. Defined contribution plans, too, can be complex, but the Employee Benefit Research Institute says, "their complexity is less apparent." Participants have individual accounts with known dollar values. "Younger workers react favorably to defined contribution accounts because account balances showing current cash value appear more meaningful than the promise of a monthly benefit for an unknown amount at retirement." Several options may be available to you in making contributions to the plan, including savings and thrift plans, profit-sharing plans, 401 (k) plans, and employee stock ownership.

In savings and thrift plans, employees contribute a predetermined portion of earnings into an account. Employers provide an incentive to participate in these plans by matching all or part of this contribution and adding it to the employee's account. Depending upon the provisions of the plan, these contributions may be invested in various ways, such as stocks, bonds, and money market funds. Employees may fund their contribution through a salary reduction plan, which allows employees to defer income taxes on their contributions and earnings until they withdraw the money. These contributions are known as "employee elective deferrals" or "pretax contributions." In the BLS survey, 30 percent of employees participated in savings and thrift plans.

Profit-sharing plans were available to 15 percent of all employees covered by the 1989 BLS survey. Under these plans, employees share in their companies' profits, which may provide an incentive for increased employee productivity. Employer contributions may be determined by a specific formula, such as 4 percent of profits if annual sales were between $2 million and $5 million and 8 percent if sales exceed $5 million. In some plans, the employer contribution is determined by the employer. Once the contribution is set, it is allocated to the employees. The most common method of allocation is in proportion to the employee's salary.

There are three types of profit-sharing plans--cash, deferred, and combined. In a cash plan, benefits are paid directly to the participants in cash, usually at the end of the year. The deferred plan holds the money in an account until the employee retires. In the combined plan, the employee receives a portion of the profits in cash, with the remainder being placed in a deferred account.

Named for the corresponding section of the Internal Revenue Code, 401(k) plans allow employees to have a portion of their pay contributed to either a thrift plan, a profit-sharing plan, a salary reduction plan, or to a "cafeteria" plan, which will be discussed later in this article. These contributions are tax deferred.

According to the Employee Benefit Research Institute, employee stock ownership plans are "an innovative way for employers to share ownership with employees without requiring the employees to invest any of their own money." Each employee has an individual account. As with profit-sharing plans, contributions to these accounts are proportional to a participant's salary. Employee stock ownership can provide substantial financial benefits, but there is greater degree of risk than in other defined contribution plans, because the funds are primarily invested in the stock of one company.

Employee Assistance Programs/Health Promotion Programs

Programs for employee assistance and health promotion, says the Employee Benefits Research Institute, "are being developed and offered by employers to address three basic issues: 1) rising health care costs; 2) increasing concern about how employees' personal problems affect job productivity; and 3) growing awareness of the benefits of good health and interest in participating in fitness programs."

The BLS survey found that employee assistance programs were offered to 49 percent of the workers. They provided employee referral and counseling services related to alcohol and drug abuse and other personal problems. Employee health promotion or wellness programs were available to 23 percent of employees.

Disability Benefits

Public and private programs are available to pay benefits to employees who are disabled and unable to work. Social Security and workers' compensation are the major programs required by law. The Social Security program provides long-term disability benefits to workers who satisfy certain conditions. The amount paid equals the worker's retirement benefit. Workers' compensation is for employees who are disabled by occupational injury or illness. The amount of the benefit depends upon State laws and the extent of the disability.

Generally, employers may offer several types of disability benefits. In its 1989 survey, BLS studied short- and long-term disability insurance. Short-term disability protection was available to 89 percent of all employees covered by the survey, through sick leave, sickness and accident insurance, or both. Sick leave usually provides 100 percent of the worker's normal earnings, whereas sickness and accident insurance usually replaces 50 to 67 percent of pay.

Long-term disability insurance, which typically pays 50 or 60 percent of earnings, was available to 45 percent; 29 percent were eligible for immediate disability benefits under their pension plans. Long-term disability payments usually begin 6 months after the disability becomes apparent and continue for a specified number of months or until retirement age.

White-collar workers were more likely to receive paid sick leave and be covered by long-term disability insurance than were blue-collar workers. Sickness and accident insurance and immediate disability pension benefits were more prevalent among blue-collar workers.

Education Benefits

Do you want to finish college but lack the money? Have you found a course at the local university that will provide the skills you need to win that promotion? Your employer might pick up the tab. Sixty-nine percent of the employees covered by the 1989 BLS survey were eligible for job-related education assistance benefits. The Employee Benefit Research Institute reports that in 1984 most tuition assistance plans paid for degree and career-related courses as well as job-related courses. Ninety-nine percent of the plans covered expenses for courses directly related to an employee's job; 14 percent reimbursed expenses for courses that were neither job related nor degree related. About a quarter of the employers surveyed paid 100 percent of tuition.

Education assistance benefits take a variety of forms. Tuition aid is usually offered by employers to allow employees to pursue studies on their own time. The employer pays the tuition in advance or reimburses the worker for it. Frequently, the grade you receive determines the rate of reimbursement. For example, an A would earn a 100-percent reimbursement; a B, 90 percent; and a C, 80 percent. Other forms of education assistance include employee scholarships and loans, apprenticeship training, and leave to allow employees to complete course-related work.

Education assistance benefits can provide both immediate and long-term payoffs. Statistics show that the more education you have to more pay you're likely to receive. The number of employees who use these benefits is unclear. In the 1970's, only 3 to 5 percent of eligible employees did. In 1985, the National Institute for Work and Learning reported that only about 10 percent of eligible employees used the education benefits available to them.

Dependent Care Benefits

In the 1980's, the growth in the number of companies offering childcare benefits to their employees was substantial. An estimated 600 employers provided benefits in 1982; by 1989, the number had grown to more than 4,000. Despite this growth, however, this number represents only a small portion of employers in the country. In the 1989 BLS survey, childcare benefits were available to only 5 percent of employees of large and medium firms.

Children are not the only dependents workers may need to care for. Over the next several years, the number of employees responsible for providing care for elderly relatives is likely to increase. The 1989 BLS survey found that 3 percent of employees were eligible for eldercare benefits. Some benefits professionals contend that eldercare benefits will need to be added to employee benefits packages. A recent study by the Travelers Insurance Company found that 28 percent of its employees provided care for a friend or relative aged 55 or older. In 1991, the Stride Rite shoe company will open an intergenerational day care center to care for the children and parents of employees.

Life Insurance

Life insurance plans covered 94 percent of full-time employees within the scope of the 1989 BLS survey. Nearly all participants had the cost of a basic plan paid entirely by their employer; an employee's contribution, if any was required, was commonly a set amount per $1,000 of coverage, such as 25 cents per month per $1,000 coverage. Coverage is usually linked to earnings. The most common method to determine benefits is to multiply annual earnings by a factor of 1 or 2.

Survivor income plans are related to life insurance plans. Both are designed to provide benefits to the survivors of deceased employees. While life insurance plans usually pay benefits in a lump sum, survivor plans generally provide annuities, regular monthly payments.

Employees can usually convert the insurance coverage to an individual life insurance plan when they leave their job but should check their plans for details.

Flexible Benefits Plans and Reimbursement Accounts

Flexible benefits plans, reimbursement accounts, or both, were offered to 24 percent of employees in medium or large firms in 1989, up from 13 percent in 1988. In 1986, these benefits were available to only 5 percent of employees. Flexible benefits plans, also known as "cafeteria" plans, allow employees to choose between two or more types of benefits. The most common choices offered were health care; life and long-term disability insurance; and the option of receiving cash instead of benefits. Reimbursement accounts, also known as flexible spending accounts, provide funds from which employees pay for expenses not covered by their usual benefits package. These accounts are usually financed by pretax employee contributions, although some are funded wholly or in part by employer contributions.


Benefits, as a percentage of total compensation, have increased dramatically over the last several decades. Whether this increase will continue is uncertain. What is likely is that employers will continue to respond to the needs of a changing work force with innovative and attractive benefits packages. Consider carefully the options available to you. Will it be worth in to take that new job with a better salary if you have to sacrifice the comprehensive health plan you present plan provides? Do you have trouble saving money? Check to see if your company has a thrift savings plan. Suppose you're lucky enough to have a couple of job offers to consider, with similar duties and similar pay. How do you decide? Maybe one employer offers the education assistance you need to get the training you want. Take the time to examine what your employer has to offer. It is to your benefit.

If you have questions concerning your employee benefits, especially your coverage under COBRA, write:

Pension and Welfare Benefits Administration

Division of Technical Assistance and Inquiries

Frances Perkins Bldg.

Rm. N5658

Washington, DC 20210

or call: (202) 523-8784 or 523-8776.

Choosing a Health Plan

As health costs continue to climb, you can expect employers to seek other ways to help reduce their health premium expenditures. You should pay close attention to this important and increasingly complex benefit. The Employee Benefit Research Institute says, "When choosing health care coverage, employees should take their particular needs and preferences into consideration, the range of benefits, the accessibility of care, the cost of premiums, the amounts of deductibles and copayments, and the limits on out-of-pocket expenses for catastrophic illness."

Many employers offer a single health plan to employees. Others, such as the Federal Government, may provide a range of options from which to choose. Health benefits experts counsel employees to look first at what a plan covers and then at what it costs. A cheap plan can prove expensive if it does not provide the protection you need. The same advice pertains to the deductible portion of health plans. Consider deductible costs in conjunction with the benefits provided. To help curb costs, many employers are raising the deductible that employees pay while keeping catastrophic coverage in place. If your plan has a copayment requirement, check to see whether it has a stop-loss provision, which caps the amount you pay, so that when your copayment share reaches $1,000, for example, the plan pays the remaining costs. Once you've checked these features of the plan, then consider other options that may be included, such as dental and vision coverage, which many plans include. You must decide if the coverage is worth the cost.

What Happens to Health Coverage if You Lose Your Job?

What happens to your health benefits if you become unemployed? The Consolidated Omnibus Budget Reconciliation Act of 1985, often called COBRA, requires employers with health insurance plans to continue to offer coverage to former employees and their dependents: 1) for 18 months if (a) the worker becomes unemployed for any reason other than gross misconduct, or (b) there is a reduction in the number of hours worked; 2) for 36 months to the dependents of deceased workers, to the former spouse of a worker who is divorced, or if the active employee becomes eligible for Medicare. Coverage must be identical to that enjoyed by the employee before the change in employee status. However, employers can charge up to 102 percent of the group premium for their coverage. Public and private employers with fewer than 20 employees are excluded from these provisions.
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Title Annotation:includes related articles
Author:Stanton, Michael
Publication:Occupational Outlook Quarterly
Date:Sep 22, 1990
Previous Article:The 1990-91 job outlook in brief.
Next Article:Labor market trends for new college graduates.

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